INVESTING

INVESTING; The Scam Goes On

Published: September 23, 1990

DR. ENRICO S. MANGO, A LONG ISLAND ORTHOPEDIC surgeon, was growing suspicious of his stockbrokers at Wellshire Securities, a low-budget brokerage house based in New York City. During the spring of 1989, he had bought penny stocks - shares of companies too small to be listed on a stock exchange - recommended by a Wellshire broker and lost money on them. But that July, Dr. Mango bought again: 20,000 shares of Ventura, a fledgling leasing company based in Needham, Mass., at $2.50 a share.

After weeks of abbreviated phone calls, undelivered confirmation orders, vague answers and unfulfilled promises, Dr. Mango began to record his conversations with Wellshire brokers, including Edward D. Braverman. On Aug. 11, the surgeon taped the following exchange:

MANGO: So where do we stand then?

BRAVERMAN: Your 20,000 Ventura is trading at 3, and the stock is poised for its significant move.

MANGO: Before . . . it was going on 3 1/4, and about a week ago I thought it was 3 1/2. Wasn't it up a bit before that?

BRAVERMAN: Yeah, it's been trading around, you know. [The broker explains that a lot of people had dumped the stock but Wellshire itself is still buying.] MANGO: When do you think that something is going to happen with it?

BRAVERMAN: I think we're going to get a move now. Right now, in fact, it's being listed on the Vancouver this evening. [Braverman mollifies Mango with the promise that the stock price will now be publicly reported.] From Monday on, you can look at the newspaper. . . .

But information about Ventura and its stock price would not make the newspapers until much later, not until the Securities and Exchange Commission sued Wellshire in March of this year. Ventura, it turned out, had not even applied for a listing on the Vancouver Stock Exchange. And its stock had in fact been quoted by another broker at a price as low as 25 cents a share in 1989 - if a buyer could be found. According to trading records assembled by the S.E.C., Wellshire constituted virtually the only market for Ventura shares and often failed to execute its customers' sell orders.

During its brief, wild run on Wall Street, Wellshire Securities had promoted stock in Environmental Landfills, a tiny company it portrayed as poised to cash in on the New York-area garbage crisis. It also touted an assortment of other penny stocks such as Greenleaf Capital, Nightwing Group, Diversified Foods and Treats Enterprises. But Wellshire's ride was cut short by regulators acting on evidence from Dr. Mango and other investors. The penny stock brokerage went out of business this spring after its license was revoked by the National Association of Securities Dealers, the industry's self-regulatory agency. Attorneys for Wellshire argued that the company should not have been held responsible for the actions of a few rogue brokers. Braverman could not be reached for comment on this article.

There are some legitimate penny stocks, and some professional money managers do trade profitably, if care-fully, in this market. But after a decade of abuses by the con artists who have permeated the business, the S.E.C. stepped in. The commission has taken direct aim at boiler rooms - those hives where high-pressure brokers wield telephones to tout speculative, sometimes fraudulent, unlisted shares to people who lack both the knowledge and the wealth required to dabble in such risky waters. Since the crackdown began in the third quarter of 1988, the S.E.C. calculates that, through July of this year, the number of companies selling penny stocks had declined from 348 to 285. The House of Representatives has already approved a bipartisan bill that would give the S.E.C. even greater power in regulating penny-stock brokers, and the proposal's backers hope to win the approval of the Senate in a conference committee session this month.

Meanwhile, warns Martin Kuperberg, associate regional administrator in the commission's New York office, the agency is broadening its enforcement efforts, which so far have been aimed chiefly at the owners and top executives of boiler rooms. ''You are going to start to see that these salesmen are not going to escape commission scrutiny,'' Kuperberg says. ''They have to know, when they are making $500 on a $1,200 trade, that something is out of whack. They are going to be held responsible.''

The state regulators are cracking down as well. Colorado, which had liberalized its securities laws in the early 80's - and found itself invaded by penny-stock brokers - recently tightened its regulations. ''Fraudulent telemarketing through penny-stock boiler rooms is a multibillion-dollar business,'' says Philip A. Feigin, Colorado's top securities regulator. The entire market cannot be eliminated, he believes, because of Washington's marked preference for deregulation. ''So,'' he says, ''you can just try to keep out the bad guys.'' It isn't easy. For all the hue and cry, many boiler-room denizens have remained nonchalant about the crackdown. Says one penny-stock promoter in the Los Angeles area, ''It's a speed bump. It slows you down a little, that's all.''